Educational Articles

The Fed Continues To Taper

Harvey S. Katz, CFA
| March 19, 2014

The Federal Reserve concluded its latest Federal Open Market Committee meeting, the first one under the stewardship of Janet Yellen, within the past hour, noting that the nation's economy had slowed during the winter months from the healthy pace seen when the Committee last met in January. The FOMC blamed what it termed the adverse weather for much of the deceleration in activity in the past six weeks.

Overall, the Committee noted that labor market conditions were mixed, but, on balance, it saw improvement. The Fed observed, however, that the unemployment rate remained elevated. Also, "household spending and business fixed investment continued to advance, while the recovery in the housing sector remained slow."

The Fed also observed that fiscal policies were restraining economic growth, although the extent of that restraint had begun to lessen in recent months. Of note, inflation, the FOMC maintained, "has been running below the Committee's longer-run objective." Such a below-trend pricing situation raises the ultimate risk of deflation. Although the FOMC did not raise that possibility in specific terms, at this latest confab, it did opine that inflation below the 2% objective, where it is now, "could pose risks to economic performance."

Meanwhile, sensing that things are slowly getting better from an economic standpoint, the current disinflation notwithstanding, the Fed did indicate that it would be paring its current bond-buying initiative by another $10 billion -- the third such reduction in as many meetings. This latest adjustment will bring the aggregate monthly purchases down from $65 billion to $55 billion.

Finally, the Fed noted that it would continue to closely monitor the situation as it continues its asset purchase endeavors, until the outlook for the labor market has improved substantially in a context of price stability. While no timetable for concluding this program was advanced, the general assumption has been that the central bank will wind up its efforts later this year. The Fed also held its near-zero level of short-term interest rates (i.e., the federal funds rate target) intact.

On balance, this policy initiative was in line with expectations and it suggests that the Fed, under the current lead of Janet Yellen, seems to be moving in tandem with the Ben Bernanke-led central bank that preceded it.

At the time of this article's writing, the author did not have any positions in any of the companies mentioned.